Self-employed income protection in the UK explained

Income protection is a type of life insurance policy that provides a monthly payout if you're unable to work due to illness or injury. It acts as a financial safety net that allows you to focus on your recovery without the stress of lost income and mounting expenses.

In this guide we explain what self-employed income protection is, how it works and what it covers.

What is self-employed income protection?

If you can’t work because of illness or injury, self-employed income protection provides a replacement income. It helps to meet your living expenses, such as rent or mortgage payments, and utility bills.

Income protection policies typically cover conditions such as back pain, broken bones, mental health issues like anxiety and depression, as well as serious illnesses including cancer, heart disease, and stroke—provided these conditions results in you having to take time off work. Any claim requires the illness or injury to cause incapacity that meets specific criteria and definitions set out by the insurance company

After a successful claim, you’ll receive a monthly payment until you return to work, retire, die, or the policy ends – whichever comes first. You can usually expect payout amount up to 60% of your gross salary, depending on how much you earn. You won't usually need to pay income tax on this amount, so it should be enough to cover your everyday outgoings.

Read more: What is income protection insurance and why you need it?

Do I need income protection insurance if I’m self-employed?

As a self-employed person, there’s no employer to pay sick pay. So, you may have to rely on state benefits such as Employment Support Allowance (ESA) or Universal Credit. Whilst these benefits can be a lifeline, they won’t be enough to replace your earned income.

Let’s see how income protection insurance helped Julian. He injured his shoulder when skiing and needed to take three months off work to recover. He had a Vitality Income Protection plan that guaranteed a payment of £2,000 per month. This was enough to cover his regular outgoings. When he set his plan up he had chosen to defer taking payments for a month, so his income protection plan paid out £4,000 for two of the three months he was off work.

It’s worth considering income protection cover if:

• You have limited savings. Do you have enough savings to pay for your essential outgoings until you can go back to work? If not, income protection insurance could bridge the gap.
• You have a family or dependants. Do your partner or children rely on your salary? Income protection insurance could help to take care of them while you’re getting better.
• You have outstanding debt. Are you currently paying off any credit cards or loans? You could use some of the money you receive from income protection to keep on top of these payments.

Read more: Can you get sick pay if self-employed?

How does self-employed income protection work?

Income protection provides a replacement tax-free monthly income if you can’t work because of illness or injury. The illness or injury you have will need to meet the criteria set out by the insurance company.

When you set up your claim you can choose to defer taking payments for a period of time, which can be for several months. This will usually make the cost of your cover cheaper. Then, when you make a claim your payments will start after this deferred period.

The overall cost of your cover depends on things like:

• Your age
• The type of job you do
• How long you want cover in place
• Your current health and lifestyle
• Your chosen deferred period.

With each successful claim, you’ll receive a monthly payment until you return to work, retire, die, or the policy ends – whichever comes first. The insurance can help to meet your living expenses, such as rent or mortgage payments, and utility bills.

Some insurers, like Vitality, also support you to get back to work. Our Income Protection helps you get back to work with its built-in Recovery Benefit. We offer four dedicated support services to help recover from the conditions related to your claim.

Depending on the nature of your claim, you’ll get:

• Access to a network of physiotherapists for musculoskeletal conditions
• Mental health counselling for mental health-related claims
• Neurological rehabilitation for relevant neurological conditions
• A personalised 8-week cancer support programme for those recovering from cancer.

What does self-employed income protection cover?

Income protection insurance covers you for illness or injury. So, if you break your arm or get diagnosed with cancer, you’ll most likely be covered. As long as the illness or injury means that you have to take time off work.

It pays out a regular income, usually monthly. And the amount you receive depends on how much cover you need and what you earn. You can use this money to help pay your regular bills, such as your mortgage or utilities.

It’s different to critical or serious illness cover. This pays out a lump sum if you’re diagnosed with a serious illness. Whereas income protection pays out a monthly amount until you get back to work.

And income protection doesn't pay out if you die. Your regular payments will stop then. Life insurance is what you need if you plan to leave a lump sum when you die.

With some providers, like Vitality, you get access to health support services. But income protection is not a health insurance plan. However, you can use your monthly payments to pay for private health treatment if you wish.

What’s not covered with self-employed income protection?

There are some things that your income protection payout can’t be used for. Such as business costs. Things like office space or your suppliers’ invoices. And you may not be able to use lump sum income protection payments to pay off large debts such as a mortgage. The payouts are for regular monthly personal expenses.

Also, you can't claim this insurance as a business expense. When you take out this cover as a business owner, you’ll pay tax on it. But when you make a successful claim, your payout will be tax-free. If you claim it as an expense through your business, HMRC would want you to pay tax on the payout.

Is income protection insurance worth it?

Before you take out self-employed income protection ask yourself the following questions.

Do you need it? Some people have extensive savings or family who can support them. Others are young with no major responsibilities. In these cases, you may decide it’s not worth it at the moment, but you might consider it in the future.

What kind of risks do you face? If you’re self-employed and you work in a high risk environment, such as roofing, you face more risk at work than a graphic designer. Or if you take part in extreme sports, you should consider how an injury would impact your work.

Can you survive on government benefits? You may own your home outright or have very low outgoings. In this scenario, you may be able to get by on government benefits.

Is a different kind of insurance more suitable? Below we take a look at other types of insurance you could take, such as serious illness cover, which might be better for your circumstances.

How much is income protection insurance?

The cost of your cover depends on several factors. These include the amount of cover you choose and your individual circumstances. The fact that you're self-employed will also have a bearing. Insurers will usually consider:

• Your age. As you get older, you’re more likely to make a claim
• Your current health and whether you have any existing medical conditions
• Your occupation and the risks involved in your job
• How much cover you need to replace your income
• How long your cover will last
• How long you choose to defer payments. You can reduce the cost of cover by deferring your payout for several months.

What other insurance policies should self-employed people consider?

Income protection insurance is useful for replacing lost income when you’re too unwell or injured to work. But there are other insurances you should consider when you’re self-employed.

Life insurance

This pays out a lump sum if you die while the plan is in place. It’s useful for paying off debts, such as a mortgage or large loan. It can also be used to make sure your family are financially secure, especially if you earn more than your partner or you’re a sole parent. A life insurance payout can help to:

• Pay off debt
• Pay for day-to-day living expenses
• Cover education costs
• Maintain your family's standard of living
• Supplement a lack of savings.

Read more: Difference between life insurance and income protection explained

Serious Illness Cover

This insurance pays out a lump sum to you if you’re diagnosed with an illness that's covered under the policy. Illnesses covered include:

• Cancer
• Heart attack
• Stroke
• Permanent disability

Serious Illness Cover is different to income protection because it pays out a lump sum rather than an income. But like income protection, you can use the money to help pay the bills as you recover from or adapt to your new condition.

Read more: Serious and critical illness cover explained

Health insurance

This type of insurance provides access to private healthcare and helps cover the cost. It covers things like seeing a private GP, physiotherapy, access to specialist drugs and treatments. It’s particularly useful if you’re self-employed as you can be seen quickly and at a time and place that suits your schedule.

Read more: How does private health insurance work?

Self-employed income insurance – things to consider

• Policy cease age: This is when you expect to stop needing the insurance. It will be the age when you plan to retire
• Deferral period: The period of time from the day you become unable to work until you receive insurance payments. Some people choose to receive payments immediately while others choose to defer payments. This can be the case if, for instance, if they have savings that they would rather use first
• Pay-out length: Income protection usually covers you until you retire or can return to work. But, some people choose shorter pay-out lengths of a year or two, for a lower premium
• Sum assured: If your average monthly income is high, it will cost more to assure it than someone earning less. This is because the insurer will need to pay out more if you are unable to work
• Current age: The older you are, the higher your insurance premiums will be.
• Medical history: Your personal medical history may affect the cost of your premiums.

Vitality Income Protection for self-employed

Vitality’s income protection plan provides a regular monthly income if you’re unable to work due to illness or injury. The payout is tax-free and can help pay your mortgage, rent or other monthly outgoings whilst you recover. And as a self-employed person, you can start receiving payouts from as early as one month after you make your claim.

But it doesn't stop there. Our Income Protection helps you get back to work with its built-in Recovery Benefit. We offer four dedicated support services to help recover from the conditions related to your claim.

Depending on the nature of your claim, you can be given:

• Access to a network of physiotherapists for musculoskeletal conditions
• Mental health counselling for mental health-related claims
• Neurological rehabilitation for relevant neurological conditions
• A personalised 8-week cancer support programme for those recovering from cancer

If you take part in the Vitality Programme, which is offered as part of your insurance, you could get discounted spa breaks, weekly coffees and gym membership as some of your rewards.

Key takeaways

• Income protection is a type of life insurance policy that provides a monthly payout if you're unable to work due to illness or injury. It acts as a financial safety net that allows you to focus on your recovery without the stress of lost income and mounting expenses
• It helps to meet your living expenses, such as rent or mortgage payments, and utility bills. But you can’t use it to pay any work-related expenses
• You can expect to receive about 60% of your gross self-employed salary as an income. You won't usually need to pay income tax on this amount, so it should be enough to cover your everyday outgoings
• The payouts will typically continue until you are well enough to return to work.

Related: Life insurance for the self-employed